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In retrospect, not getting a bank charter two years ago may have been one of the best things to happen to Wal-Mart Stores Inc.'s financial services agenda.

At the very least, the nation's largest retailer has been spared much of the reputational damage — and increasing regulatory scrutiny — buffeting most banks and nonbank financial companies this year.

Financial products and services are a relatively small part of Wal-Mart's offerings. But even without a bank charter, Wal-Mart has spent the past few years building itself into a significant competitor to traditional financial services institutions, especially with products aimed at the growing market of underbanked and low-income consumers who are largely underserved by the banking industry.

Demand for those offerings is growing, as more and more consumers look for alternatives to traditional financial services amid the recession and industrywide cutbacks on consumer credit. And Wal-Mart's brand, burnished by its ubiquitous marketing campaign ("Save Money. Live Better."), compares rather favorably right now to the general public perception of the banking industry, which has come under fire for all sorts of practices, including the checking overdraft fees that can make prepaid cards seem like a bargain.

Wal-Mart executives are quick to point out the comparison.

"Our expectation is that they will continue to drop the banks, and buy [Wal-Mart's prepaid] cards," Eduardo Castro-Wright, Wal-Mart's vice chairman and head of its U.S. division, said in response to a question from an analyst during the Bentonville, Ark., company's annual meeting last month.

He referred to Wal-Mart's decision in February to cut the pricing on its prepaid cards and said, "The timeliness of that was very good, because it came at a time when the Wal-Mart brand was trusted, when I think that the banks were not as much."

By not having a bank charter, Wal-Mart has also avoided much of the discussion in Washington around nonbank banks, the separation of banking and commerce, and what the fate of industrial loan companies should be under proposed regulatory reforms.

The retailer, which repeatedly tried to enter the banking business in what it said was a bid to reduce the card processing fees it paid other banks, made its last effort in July 2005, with an application to charter an ILC in Utah. It withdrew that application in March 2007 — two years before the Obama administration unveiled regulatory reform proposals that, as originally drafted, would have effectively eliminated specialty charters.

"Maybe they dodged a bullet," said Joseph Mason, a professor at Louisiana State University.

To be sure, Mason and analysts who follow the company said Wal-Mart would likely have a much larger and more profitable financial services arm right now had its charter application been approved. The retailer does not break out results for the unit and would not provide any detail for this article.

All the same, "Wal-Mart's coming to the realization, 'You may not get the charter, but that doesn't prevent you from getting the consistency reputation in financial services,' " Mason said. As for competition from traditional banks, he said, "Right now, I don't see that pushback, and of course the crisis is aging, so I don't think we're going to see anything hinder Wal-Mart from amassing a financial superstore even if they don't do it with a charter."

Jennifer Tescher, the director of the Center for Financial Services Innovation, a nonprofit affiliate of Chicago's ShoreBank Corp., took an even brighter view of the retailer's failure to get a bank charter. "Given what's happened in the banking sector, this could be the best thing that's ever happened to Wal-Mart, particularly at a time when Washington is looking into ILC charters and OTS charters," she said. "Everyone else is focusing on structural issues and capital issues and the rest, while they're really able to focus on the consumer offering."

Wal-Mart says it has put prepaid cards in the wallets of 2 million customers, and its decision to cut pricing on those cards was seen as a serious stimulant to the small but rapidly growing prepaid industry. The retailer, which rents some in-store space to branches of partner banks, has also long offered money-transfer and check-cashing services in some stores through its MoneyCenters, and in August it started offering walk-in bill payments at its more than 3,500 U.S. stores — a branch network that would be the envy of many traditional banking companies. And in September Wal-Mart said it would start to pay its 1.4 million employees through payroll cards instead of paper checks, if they did not have direct deposit.

"The fact that Wal-Mart is coming out at this time with these sorts of economic offerings puts them in a really great position to capture market share at a time when consumers are disaffected with the banking industry," Tescher said.

Some consumer advocates, who have long criticized Wal-Mart's labor practices, acknowledged that it has a better reputation than many banking companies — at least in the eyes of its customers. "There are things offered by Wal-Mart that banks are not able to provide, or it is going into places that banks are not willing to," said Linda Sherry, the director of national priorities for Consumer Action. But "the Wal-Mart brand is perhaps more trusted by individuals and people who shop at Wal-Mart than by consumer advocates and union types."

Lloyd Constantine, the lawyer who represented Wal-Mart during its class-action antitrust lawsuit against Visa Inc. and MasterCard Inc. over their "honor all cards" policies, expressed some mixed emotions about the retailer (mostly over his fees and his relationship with its legal team) in his recent book about the case. But he said in an interview last month that if Wal-Mart had succeeded in its bank charter bid, "that would have served the American public well."

He noted that the banking industry has by and large responded to the poor economy, rising losses and new legislation by raising interest rates and fees on most credit cards. "Wal-Mart's instincts are just the opposite — lower prices, lower excess, streamline, simplify," he said. "That approach to banking is absolutely necessary and desired in the United States, and the fact that they were blocked from doing that is an absolute tragedy."

Not all financial institutions are threatened by Wal-Mart's financial services ambitions. After withdrawing its bank charter application, the retailer embraced a partnership model for financial services, relying on institutions like General Electric Co.'s GE Money Bank, which issues its branded credit cards and prepaid cards, and Fiserv Inc.'s CheckFreePay unit, which provides its walk-in bill service. (GE's entire finance arm, of course, is another company whose fate has come into question in the wake of the regulatory reform proposals.)

The most recent versions of those reforms, in draft legislation released by the House Financial Services Committee and the Treasury last month and even in the draft legislation that Senate Banking Committee Chairman Chris Dodd released Tuesday, would not require commercial firms to divest banking operations.

Still, in the wake of those reform proposals, whether or not its partnership strategy is the most ideal business model, Wal-Mart is likely stuck with it.

"Unfortunately, I think that from a dogmatic philosophical perspective, the regulatory door has closed" on Wal-Mart's ability to reapply for a bank charter, Mason said. "That's silly. I think the industry could use more capital from whatever source," but "I do not think they could crack regulators to allow them in."

Jane Thompson, Wal-Mart's president of financial services, told American Banker in August that "we don't have plans for anything relative to a bank."

(Wal-Mart would not make Thompson available for interviews for this article, citing a quiet period ahead of its quarterly results, which were to be announced today.)

As Tescher noted, Wal-Mart has now accomplished most of what it identified as its initial financial services goals in the wake of its withdrawn charter application. It said in 2007 that introducing the prepaid card and expanding its MoneyCenters to more stores were its priorities, and Thompson told The New York Times in June of that year, "Our concept is to go up the credit ladder of financial services."

As recently as a year ago, reports surfaced in BusinessWeek that Wal-Mart had held talks to brand a "clean" credit card, without high interest rates or hidden fees. But the passage of the credit card law, which mandated more transparency and disclosures and fewer interest rate increases, essentially made such a product redundant. And so far most of Wal-Mart's financial offerings have been non-credit-related, which has turned out well for the retailer, since it has avoided much exposure to credit losses and other downsides of the credit crunch.

But at the investor meeting in October, Thompson vaguely alluded to plans to explore credit. "We also think, because of what's happening on credit, and the growth of debit, and mobile, and online, that there's a whole lot more innovation available that we can take advantage of," she said in response to an analyst question.

Tescher, meanwhile, wants Wal-Mart to turn its attention to a different financial product: "Saving, saving, saving," she said. "Particularly in this market and time, it would be incredibly powerful for Wal-Mart to be able to say their customers, 'Not only are we able to help you live more cheaply, we're able to help you build a nest egg or at least an emergency fund.' … I think they would need to do it in partnership, but they could add a savings feature to their prepaid card. Lots of prepaid companies do that."

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